designing the open enterprise

Designing The Open Organization

Introduction

Most people don’t realize that business organizations have short half-lives. Only 16 of the top 100 American

corporations in 1917 still exist today. The average life expectancy of a Fortune 500 firm is now 40 to 50 years.

Firms fail to survive or remain independent for a multitude of different reasons. The business media frequently

points out that non-surviving firms moved into businesses they did not know, or a market leader failed to respond

quickly enough to important cues in the marketplace. Others argue that failure is often due to psychological

pathologies or leadership failure within the top management team. A recent study by Seton Hall’s Stillman

School of Business and New York-based crisis management consulting firm Buccino and Associates, that involved

surveying 1,900 executives, concluded that businesses fail due to internal reasons, such as excessive debt,

improper planning and failure to change, as opposed to external factors like competition and the economy.

The post-mortem analyses vary, but one element tends to underlie most business failures - they failed to operate

as an open organization.

The Meaning of an Open Organization

The concept of viewing organizations as an open system was first popularized by the London-based

Tavistock Institute. One of its pioneering thought leaders, A.K. Rice, stated that any given organization

takes various things from its environment, uses those in some sort of conversion process, and then exports

products, services, and waste materials which result from the conversion process. One key import of the

organization is the information that’s acquired from being “wired” with the environment - and which is used

to help the organization survive.

The concept of open systems is far from being new. Kenneth Boulding, the imminent social scientist,

described our planet as an open system decades ago. In the discipline of biology, open systems theory

has been applied to the study of our environment and earth’s ecosystems for years. On the corporate

front, General Electric’s former CEO Jack Welch espoused a “boundarylessness” organization with no

internal barriers resulting from hierarchy, geography, and function, and forges a strong partnership with

customers and suppliers. Peter Senge, in his advocacy of the learning organization, underscores the

importance of systems thinking - which he argues involves looking at the whole instead of just the parts.

The concept of open systems also underlies many of today’s popular organizational renewal techniques,

including total quality management and Six Sigma improvement efforts . A firm that practices total quality

management must continuously uncover and anticipate customer expectations, and bring that information

into the firm to design and deliver products/services that provide more value to the customer than

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competitive offerings. That explains why 61 percent of the original criteria for the Baldridge Quality Award

were targeted toward the organization’s ability to use information relating to customers, employees, and

business processes.

How Does an Open Organization Operate?

As diagram 2 illustrates, the key design elements of all organizations include structure, systems, people,

and culture. In an open organization, these design features support open system principles. Diagram 3

gives a few key examples of design features that further these principles.1

Key Elements of Organization Design

Diagram 2

Structure Culture

• Organization structure • Values

• Business processes • Norms

• Job design • Management philosophy

• Roles & responsibilities

Systems People

• Methods & procedures • Technical competencies

• Company policies • Behavioral competencies

• Human resource management systems • Leadership competencies

1 Key Elements of Organization Design diagram has been adapted from Nadler & Tushman’s congruence model. Nadler, D. & Tushman, M. “A Congruence Model for Diagnosing Organizational Behavior.” Approaches to Managing Organizational Behavior: Models, Readings, and Cases. Boston: Little, Brown, 1981.


People People

SystemsSystems

StructureStructure

CultureCulture Products /Services

Products /ServicesStrategyStrategy


• Information systems

• Technology

• Product & service development/delivery systems

Key Organization Design Features in an Open OrganizationDiagram 3

Culture Employees are business partners

High levels of egalitarianism exist

Information openly shared among all people

“Messengers are not shot; controversial views welcomed

Expertise and quality of ideas more important than rank

Paternalism taboo; performance over tenure

Company preoccupied with business growth

People Employees have a diverse set of work experiences

Key competencies: intellectual curiosity, innovativeness,

Leaders are developed to facilitate change; to be anticipatory

Employees know the business, marketplace, and competitors

Moderate amount of turnover considered healthy

Diverse workforce and cadre of leadership

Structure Lean (but not anorexic)

Wide span of control by members of management

Few levels (enables information to move more quickly)

Key, macro business processes identified and streamlined

People decentralized; paper centralized

Organization design is product or market focused.

Systems Performance management and rewards support innovative behavior.

HR management practices strategic in orientation

Active leadership development process

Active, comprehensive training and education process

Strategic planning interactive, involving many stakeholders

Information system open. Equal access to information.

Mechanisms exist for customer and employee feedback.

Employee communications accent business news and trends.

Benchmarking and the use of industry “best practices” common.



The Key Byproduct of an Open Organization: The Ability to Create Information

Information is a necessary ingredient for learning, innovation, and adaptation – ultimately survival of the

firm. None of these activities can occur unless employees receive and synthesize the rich cues that are

presented through the speech, words, and the constant stimuli they receive from inside and outside the

corporation.

Peter Drucker stated nearly a decade ago that we are entering “the knowledge society” in which the basic

economic resource is knowledge. He said:

“The single greatest challenge facing managers in the developed countries of the world is to raise the

productivity of knowledge and service workers. This challenge, which will dominate the management

agenda for the next several decades, will ultimately determine the competitive performance of

companies. Even more important, it will determine the very fabric of society and the quality of life in

every industrialized nation.”

The key point made by Drucker is that knowledge can not be generated without information. And, the

most innovative and nimble companies will increasingly be those who have the ability to acquire,

synthesize, and analyze information more rapidly than their competitors.

Information can be obtained through external collection or through the internal development of ideas.

Collecting information externally (about customers, the marketplace, etc.) can only happen if employees

cross their firm’s boundaries and interact with the outside world on a continuous basis. Generating internal

information occurs within the organization and through such activities as analyzing the results of previous

actions, sharing “best practices” across divisions, and building feedback loops into key programs and

processes. Open organizations are highly adept at linking external and internal information.

A large amount of information should be generated - in fact, to the point of redundancy. As Nonanka

states:

“Sharing extra information also helps individuals understand where they stand in the organization,

which in turn functions to control the direction of individual thinking and action. Individuals are not

unconnected but loosely coupled with each other, and take meaningful positions in the whole

organizational context. Thus redundancy of information provides the organization with a self-control

mechanism to keep it heading in a certain direction.”

Generating lots of information is important, but that’s not enough. An organization must have the ability to

take a large amount of ambiguous information and apply it in a manner that results in learning.

Organizations that are skilled in this regard are called learning organizations. They continually improve by

rapidly creating and refining the capabilities needed for future success.



The Danger in Becoming Too Open

Becoming an open organization entails some risks. They include:

Becoming Too Close to the Customer

Few would disagree that satisfying the customer is key to any company’s survival. However, the mantra to “get

close to the customer,” can not be pursued in a simplistic or blind manner. After all, not all customers know what

they want. Their stated expectations may not be their actual expectations. Some customers are so demanding

that it is not in the firm’s best interests to attempt to satisfy their whims. According to Macdonald, getting too

close may limit the ability to innovate or to move fast because getting close involves more integration of the

customer and supplier, with each being less able to make a major change without the participation of the other.

Losing Predictability in How the Organization Operates

Stevenson of the Harvard Business School recently lamented on how organizations are losing their predictability.

He states:

“The discontinuities that so many current management practices introduce into people’s lives many not

drive them mad, but they do encourage them to keep their resumes up to date and their commitments

to their employers minimal.”

Maintaining the status quo is certainly not the prescription, but some organizations and managers have to be

more sensitive to adopting so many different programs and activities that are not always integrated into or even

relevant to the firm’s most pressing problems. Change fatigue among employees has to be avoided at all costs.

Goldstein echoes this as well, arguing that all organizations must have some degree of discrete boundary with

their environment,. This provides a safe holding environment for the anxiety and discomfort often associated

with change.

Adapting Rather than Innovating

Many successful companies, such as 3M and Sony, have built a work culture where employees are keenly aware

of industry trends and shifting consumer preferences. These firms often adapt to changes in the marketplace

through incremental product improvements or extensions to their basic entree of services. More importantly,



these companies anticipate unarticulated customer needs by offering novel, paradigm breaking new products .

3M’s development of the Post-it™ and Sony’s development of the Walkman™ are key examples.

Many theorists, including Goldstein and Senge, have commented on how organizations must pursue generative

learning and innovation, as opposed to merely adapting to the environment. While few would disagree with this

argument, it’s important to note that no organization can be innovative unless it’s also open.

The upshot is that in becoming an open organization, there still must be a certain amount of vigilance in making

sure that the organization is not just reacting, or adapting to its environment. Firms that continually innovate

when needed inevitably lead the pack. Being open, but reactive rather than anticipatory, limits performance in

the marketplace.

Some Final Thoughts

The eerie parallel that runs through the histories of many business failures is how success became the seed of

failure. A close examination will usually show that old solutions continued to be applied to new problems, or

worse, customer expectations changed, but the products and services being delivered to them remained the

same. The real failure is that these firms did not operate as an open system, and important cues went

unrecognized. Critical information was either consciously or unconsciously ignored. The end result: market

share and profitability suffered.

There is an increasing amount of evidence that firms can consciously structure and manage their survival by

building a culture, organizational structure, systems, and workforce that support the principles of open systems.

America’s best companies do this - and so can others.

References

Dixon, N. “A Practical Model for Organizational Learning.” Issues & Observations. Center for Creative

Leadership, Vol. 15. No.2, 1995.

Drucker, P. “The New Productivity Challenge.” Harvard Business Review, Nov.-Dec., 1991

Goldstein, J. The Unshackled Organization. Portland: Productivity Press, 1994.

Gandosy, R. “The Need for Speed,” Journal of Business Strategy, Jan. – Feb. 2003

Hurley, R. and Laitamäki, J., “Total Quality Research: Integrating Markets and the Organization.”

California Management Review, Vol. 38, No. 1, Fall 1995.

Levinson, H. “Why the Behemoths Fell: Psychological Roots of Corporate Failure.” American Psychologist,

May 1994.

Macdonald, S. “Too Close for Comfort?: The Pitfalls of Getting Close to the Customer.” California

Management Review, Vol. 37, No. 4, Summer 1995.

Nonanka, I. and Takeuchi, H. The Knowledge Creating Company. New York: Oxford University Press,

1995.

Rice, A.K. The Enterprise and Its Environment. London: Tavistock Publications, 1963.



Senge, P. The Fifth Discipline: The Art and Practice of the Learning Organization. New York: Doubleday,

1990.

Stevenson, H. and Moldoveanu, M. “The Power of Predictability.” Harvard Business Review, July/August

1995.

Wick, C. and Leon, L. “From Ideas to Action: Creating a Learning Organization.” Human Resource

Management. Vol. 34, No. 2, Summer 1995.



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designing the open enterprise